The new version of Microsoft's cash cow--code-named Office 11--comes as sales of the desktop software have begun to plateau, said analysts. While Office still controls more than 90 percent of the desktop office market, customers say they see fewer new features that would compel them to upgrade to the latest versions. Although a new licensing plan will help keep customers in the Microsoft fold, any slump in sales could make a big impact on the software maker's balance sheet. Office contributes nearly one-third of Microsoft's overall revenue.

With Office 11, Microsoft's new strategy is to focus more on features targeted at businesses, as the company tries to expand its reach into larger customer relationship management (CRM) and enterprise resource planning (ERP) applications.

Office 11 "will be more oriented to the enterprise customer," said Gytis Barzdukas, director of Office product management at Microsoft. Overall, the company is aiming to make Office "a partner with the rest of Microsoft technology--the whole .Net area," he said, by streamlining how Office connects to data stored in back-end systems.

To make that happen, Microsoft is turning to what some analysts say is a risky strategy. The company is adopting Extensible Markup Language (XML) as a second file format in all Office applications, to enable better data exchange between the productivity suite and back-end software, such as databases. This "opening up" of Office could end Microsoft's lock on document file formats that have boosted Office sales in years past and made the software the de facto standard for desktop productivity.

The main reason for the move is to battle competitors--such as Sun Microsystems' StarOffice--which have gained strength against Office in the past year, analysts said.

Microsoft needs "to make Office less of a commodity," said Gartner analyst Michael Silver. "People think they can come in with StarOffice and replace Office because all they're getting is commodity word processing and a spreadsheet (through Office)."

With the greater use of XML in Office 11, customers may benefit from being able to generate XML documents that can be used with their own applications or those from other software developers. Microsoft could gain from XML services hooked to other products--such as .Net Server--that would extend Office's reach beyond the desktop.

Adoption of XML means that for the first time, companies would have the option of bypassing proprietary Office file formats used for more than a decade.

"It's a big risk for them," said Forrester Research analyst Ted Schadler. "They open up the file format, open up the data feed, open up the template format, and somebody can make a cheaper Office or a better Office. They're going to lose that lock on the file format they've had for 15 years."

Microsoft counters that argument by pointing out that the greater use of XML in Office will make the software more flexible and able to read the growing number of business documents generated in XML format. Office 11 supports what Barzdukas described as "arbitrary XML support." Companies that already have deployed Web services would find that their existing schemas--or XML vocabularies--would work with Office 11.

"We'll be able to read their XML in applications like Word and Excel," Barzdukas said. "Therefore, they won't have to rework their XML schemas.

What's new--and what's missing Microsoft, which is ramping up Office 11 for a mid-2003 release, said the productivity suite will go out to about 6,000 testers within Microsoft and another 6,000 external beta testers. Only select testers will have access to this first beta version, although Microsoft plans a more widely available Office 11 test sometime in the first quarter.

Microsoft hasn't fully disclosed the new features of Office 11, beyond greater XML integration. The software maker did say that Office 11 will include a revamped Outlook e-mail client. The software giant has moved the preview pane, which will now use technology found in Microsoft Reader, to the side of the screen.

Microsoft also is introducing what it calls "Search Folders," which allow the same piece of mail to appear in multiple folders. In addition, the new product will pick up extra features when attached to an Exchange Server, such as a special cache mode that speeds up accessing the Outlook e-mail data file.

One planned component of Office 11 has been shelved. Microsoft had been considering offering additional Web services derived from the company's stalled .Net My Services initiative. Office 11 users could have subscribed to additional Web services--such as online calendaring and Web-based e-mail--that would have been an adjunct to the productivity suite, but Microsoft essentially has scrapped this plan. These additional services, if any, would be provided by third-party developers, not Microsoft.

"We had talked earlier about a rich Web services environment with Office 11," Barzdukas said. "We've actually scaled back from that. You may see some partners doing some of that. But (as for) Microsoft actually hosting some of those services, we actually scaled that back."

Delivering the goods Longer term, Microsoft needs to show customers that have signed up for the company's controversial new software licensing program that they get value for their money, analysts said. Under that program, many businesses now pay an annual fee for upgrades over a two- or three-year period, putting even more of the onus on Microsoft to deliver new versions in a timely manner. Microsoft last updated Office on May 31, 2001, with Office XP.

To qualify for discounts under Microsoft's new licensing program, companies are required to move to the latest version of Office. The company estimates that 70 percent of customers purchased Office XP licenses, although many have not actually installed the software.

Silver said he thought percentage to be "rather high," but that it "shows the success of Microsoft's licensing strong-arm tactics." Gartner estimates that Microsoft's Licensing 6 plan raised the majority of customer fees for Office and other Microsoft products anywhere from 33 percent to 107 percent.

With 70 percent of users--the majority businesses--committed to Office, Microsoft needs to give customers value for what they already paid for and look for other ways to generate new revenue associated with the productivity suite, analysts say.

One way to do that is to further integrate Office into crucial business and back-end server products. That could drive sales of new and existing server software--such as the SQL Server database and Exchange messaging software---as well as sales of client-access licenses (CALs) for desktop PCs running Windows and Office.

"Office is going to end up with more servers connected to it eventually," Silver said. "You will see Microsoft do more to extend the Office brand, making more server dependencies and generating more CAL revenue."

Given the software maker's ongoing antitrust case, Microsoft also may recognized great risk in trying to further integrate Office into business processes and at the same time reach back to the server, analysts said.

"Microsoft has proprietary lock on the desktop," Forrester Research's Schadler said. "If they were to use that lock-in to sell more servers, they'd be in court so fast. They would be using their monopolist position on the desktop to sell more servers, and that's anti-competitive."

Opening up the file format greatly reduces that risk.

More uses for Office
Microsoft has a broader strategy at work that could benefit customers and also give the company a way to grow revenue. Besides the XML integration, Office 11 will include a new product known as XDocs. With XDocs, users can pull together disparate data from Word, Excel and other Office 11 applications into a form-like document for easier viewing or tabulation.

Microsoft plans to include XDocs with this week's Office 11 beta, but has made no decision whether the product will be included as one of the bundled applications or sold separately, Barzdukas said. Not all testers will receive XDocs with this first beta.

Microsoft wants to make Office the primary means by which companies access and generate all the data in their business operations. "You're going to use Office for more purposes than you do today," Schadler said.

The software giant's goal is to double Office sales this way, even though the market for the product is saturated.

"If Microsoft can get people to write their applications to Office and make it part of their business processes, it's harder for people to throw Office out and replace it," Silver explained. "They can make it an integral part of actually getting the business done, instead of (using it for) just writing letters."

"XML makes Office a rich client for Web services and to fit into larger business processes," Barzdukas said.

As Office evolves into a platform for developing XML-connected documents, businesses could start a new cycle of application development that could also benefit software makers other than Microsoft.

"We think it's a good idea and customers will benefit from the changes," Schadler said.

But again he cautioned that opening up the file formats with XML means some things might go against Microsoft.

"Sure they want to sell more servers," Schadler said. "That's an important connection to make here. There's no guarantee Microsoft's going to have a better server product for pumping data into Excel than Oracle will or IBM will."

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